India telecom sector NTP: Will it taste as good as it smells? :Macquarie Research,

India telecom sector
NTP: Will it taste as good as it smells?
Event
 The Indian telecom minister (Mr Kapil Sibal) unveiled the contours of the New
Telecom Policy (NTP)-2011 today. We are not over-whelmed but came away
with a generally positive feeling. Some progressive moves were announced
(e.g. exit options and spectrum sharing). The details and timing of these
proposals and the all-important issue of spectrum pricing however remain
unknown. It remains a „wait and watch‟ on these aspects.
Impact
 Positive view on broad thinking on spectrum issues: The pricing and
treatment of spectrum were the primary issues which investors were looking
forward to getting resolved. Mr Sibal talked about the general thinking on
these aspects. On the positive side, he mentioned that spectrum pooling and
sharing will be allowed - eventually extending to spectrum trading. The timing
has not been disclosed. On a related note, Mr Sibal also mentioned that exit
options will be provided. While the timing is again unknown, these moves
would promote consolidation and improve pricing power.
 Status quo on pricing: There was no detail on the calculation of spectrum
pricing. There were only some general statements around „market related‟
pricing due to de-linking of spectrum and license. Mr Sibal has maintained the
status quo. We will have to wait for the draft of the new proposed „Spectrum
Act‟ to address these concerns and other important issues such as spectrumre-
farming. Given the history though, we would not hold our breath.
 Roaming issue - not material: The market has been concerned about the
abolishing of roaming within India. Domestic roaming contributes 5-6% of
revenues and 6-8% of EBITDA for Indian operators. In our view, Mr Sibal‟s
speech implies that this would be done in a phased manner. We believe
operators would have enough (indirect) compensation and/ or time to adjust
pricing to be able to deal with this move.
 Other long term positives – with limited immediate impact for listed players:
These include provision of additional bandwidth to promote long term growth
and penetration of broadband and rural telephony, infrastructure status
(cheaper funding) and preferential access for domestic telecom equipment.
Importantly, a key long term positive is the intention to move towards the „next
generation‟ unified license regime. We think this implies complete
convergence and spectrum as a raw material. This would enable any entity
holding the relevant license to provide any service as per consumer demand.
Outlook
 There appears no doubt that the NTP-2011 is a step in the right direction.
Some issues remain unresolved but no new concerns have been added
either. While we are not over-whelmed, we are now more confident that the
general regulatory regime will promote clarity, growth and consolidation.
 Prefer incumbents: We expect this to benefit incumbents in the medium to
long term. Bharti remains our top pick. Idea would also benefit - but its
premium valuations seem unwarranted.